Entrust Shareholders Should Still Be Skeptical About Buyout

In a surprise move, private equity firm Thoma Bravo increased the price it is willing to pay for Entrust (ENTU) from $1.85 to $2.00 on Friday. We had forecast that shareholders would vote down the transaction in this post last week, and we suspect that a rejection of the $2 buyout will lead eventually to a bidding war over Entrust. Three other bidders expressed interest in Entrust during the go-shop period at prices higher than Thoma Bravo’s, but the board decided that these proposals were not “superior”. Therefore, we think that there is enough interest in Entrust to make it a candidate for a bidding war if shareholders vote down the current deal.

The cancellation of the shareholder meeting coupled with an increase in the buyout price was caused by insufficient shareholder votes in support of the $1.85 deal. Entrust has adopted high pressure sales tactics otherwise characteristic of pump and dump schemes to force through the Thoma Bravo deal. It claims that the increased $2 proposal is the final offer. However, Thoma Bravo has pursued Entrust since September 2007 with the intention of “using the Company as a platform to make further strategic acquisitions” (DEFM14A). So there is value in Entrust not just as a going concern but also as the core of a roll-up strategy. In addition to Thoma Bravo, there are three other potential buyers who have submitted higher bids during the go-shop period.

Adding to the high pressure tactics is the unchanged record date for the meeting. Anyone who bought shares after May 11 will not be eligible to vote on the revised deal. Not changing the record date is a trick to convince a few marginal investors to back the deal. The strategy of maintaining the old record date is consistent with our view that the vote fell just short of the required 2/3 majority. Management has postponed the meeting twice now: first by one month to July 10th, and now again by another month to the 28th coupled with an increase in the consideration. They seem to feel that they are close to the requisite number of votes.

As we pointed out in our last post, almost 22 million shares have traded since the record date at levels of up to $2.10. In the meantime, another 6 million shares have changed hands. Shareholders who have voted already for the deal are unlikely to change their vote if they have since sold their shares, and those who bought shares will not be able to vote.

The lack of detail about the go-shop period continues to irk us. Management has not disclosed the prices at which the three higher priced proposals were made. Were they made at just a cent or two over Thoma Bravo’s? If so, the price levels would probably have been disclosed as shareholders would probably agree that it’s not worth chasing an extra cent or two. However, the lack of disclosure suggests that the prices came at a substantial premium to Thoma Bravo’s $1.85. We also believe that they were made at levels well above the revised $2 deal. Were Thoma Bravo the highest priced bidder at $2, the Company would have made that clear in its extensive pro-buyout propaganda.

It is also odd that the board accepts a higher price without going through a new market check. Clearly, there was interest during the go-shop period at higher prices. If the buyer now voluntarily suggests a higher price, then maybe there has been a fundamental change in the market that has increased the value of Entrust not only to Thoma Bravo, but also to other potential acquirers, including the three that came forward during the go-shop period.

Proxy advisory firms were split on the original $1.85 transaction: RiskMetrics (formerly ISS) opposed it, where as the smaller firm Glass, Lewis & Co and Proxy Governance recommended a vote in favor. We hope that in light of the sudden increase in price, the two supporting proxy advisers finally come to their senses and see how flawed Entrust’s sales process is.

Entrust’s board continues to be split over the buyout. Independent director Douglas Schloss abstained from the revised $2 proposal. We think that shareholders should remain skeptical about the buyout and hold out for a higher price that comes from a proper market check of Entrust’s current value.